The Dow Jones Industrial Average dropped 51.70 points, 0.38 per cent, to close at 13,543.40 and the Nasdaq sank 15.20 points, 0.54 per cent, to 2,795.18, as the main indexes bounced off their worst levels of the day.

The broad-market Standard & Poor's 500 index shed 7.48 points, 0.50 per cent, to end at 1,502.17.

The market action came after Asian stocks closed sharply lower with sentiment damaged by the subprime mortgage crisis in the US. Hong Kong shares tumbled five per cent.

In the US, the turmoil in the banking sector intensified as Citigroup named ex-US Treasury chief Robert Rubin as its new chairman, replacing Charles Prince who retired as the company warned of massive markdowns from the subprime mortgage crisis.

Financial stocks remained pressured by the prospect of more writeoffs of bad real-estate loans.

'The street is convinced that the worst is not behind us, primarily since any actual reported loss or write down so far has been bigger than anticipated,' said Mr Brad Tottle, analyst at Raymond James & Co.

'Do you think that two of the biggest CEOs on Wall Street would have 'retired' if the quarterly losses were considered one-timers?' Mr Prince was the second top banking executive ousted this month following Mr Stan O'Neal at Merrill Lynch.

Others said a variety of worries were weighing on the market.

'The Citi and Hong Kong news coupled with martial law in Pakistan have caused a serious bout of risk aversion,' added Mr Andrew Busch at BMO Capital Markets, who said the banking sector issues have yet to be worked out.

'This situation with the investment banks is analogous to what the market went through when we had all the problems with Enron. The market had severe doubts over the accuracy of the reporting of earnings and accounting.'

The market moved off its lows after a report from the Institute of Supply Management showed its index of service sector activity increased to 55.8 per cent in October, suggesting strong momentum in a key area of the US economy. -- AFP